What is Inheritance Tax?

Inheritance tax is a 40% tax applied after a person dies to estates that are worth over £325,000 – or more if a home or the sale proceeds of a home are included – see below.

The value of your estate for the purpose of inheritance tax includes:

your savings

possessions including property

pension funds

subject to certain exemptions, the value of any money or property you gave away during the seven years prior to death

The first £325,000 of your estate is tax-free so the 40% tax only applies to anything that goes over this value.

What is exempt from Inheritance Tax?

If you leave your whole estate to your husband, wife or civil partner then no Inheritance Tax will be payable.

If a husband, wife or civil partner does not use all of their £325,000 tax-free limit, then any unused part can be passed on to their surviving partner.

You do not need to pay Inheritance Tax on anything you leave to charity. And if you leave 10% or more of your estate to charity, then a reduced rate of 36% tax may apply to what is left over. Special rules apply though so seek legal advice if you are planning to do this.

Gifts of up to £3,000 in each tax year are exempt from Inheritance Tax, as are small gifts to individuals and some wedding or civil partnership gifts. But be aware that gifts made while you are alive could be liable for Inheritance Tax, depending how much they were and when they were given.

How is Inheritance Tax changing?

Since April 2017 there has been an additional exemption for those leaving their homes, or the sales proceeds of their homes, to their children or grandchildren (including adopted, foster or step-children).

The amount from April 2017 is £100,000 (or the value or sales proceeds of the home if less) – this amount will increase by £25,000 every April until it reaches £175,000 in April 2020. Any unused part of this amount can be passed on to a surviving partner.

This additional exemption will also be available where someone who has died sold their home or downsized on or after 8 July 2015. The rules are complicated and you should seek professional advice.